India is expected to be a big beneficiary of the ongoing trade battle between US and China. Evidence of this trend is already visible from foreign direct investment (FDI) pipeline doubling to $175 billion from last year’s $87 billion. Given the rise in protectionism and tariff barriers, corporations are looking at shifting supply chains . UBS, the world’s largest wealth manager, in its US CFO survey found that 76% of the respondents have either shifted their supply chain or are planning to shift in response to protectionist policies such as trade tariffs and India continues to be among the top destinations in Asia for manufacturing shift.
The report also said that high number of respondents looking to diversify continues, suggesting a manufacturing shift from China is more structural and longer term in nature.
While FDI in India has increased in the last one year, there has been interest from global companies to set up manufacturing facilities for not only electronics but also heavy manufacturing as well. India’s current FDI pipeline has doubled and key focus sectors include construction, electronics, infrastructure, textiles, food processing, pharma among others. Even while analyzing the earnings transcripts of 44 global companies there has been increased references to ‘India’ and ‘trade war’ and spot nuances in language signify a potential relocation of manufacturing to India.
According to UBS, meetings with policymakers, UBS Evidence Lab results, trade data analysis, and newsflow, all point to early evidence of a pickup in manufacturing exports (including import substitution).
“Exports is one of the keys in our ‘4 Keys framework’ from which we expect an earnings cycle inflection. We expect a 15% earnings CAGR in Nifty over FY21-23, compared with 6% over the past five years. Our Nifty target for end-December 2021 is 14,700,” said UBS in its report. However it also stated that, it is too early to call whether India will have major success, but the next three years should be better than the past five years. Also, exports are highly correlated with earnings and GDP growth.
Post the corporate rate tax and recent Budget incentives for exports have been ignored by investors, believes UBS. In the recent past, government has taken steps like easing customs duties, liquidity for exporters and higher credit availability to boost manufacturing and exports.
“Local corporate commentary also suggests some pickup in mentions beyond the chemicals sector, including in contract manufacturing companies and consumer appliance companies,” said UBS.
